Capital markets union explained

Why deepening Europe's capital markets is essential

Open, well-functioning and integrated capital markets are essential for the EU to further develop its single market and attract investments. They promote growth and innovation, create jobs and enhance competitiveness.

In recent years, the EU has significantly improved the functioning of its capital markets by developing the capital markets union, an initiative to create a truly single market for capital across the EU.

Despite significant progress in the growth of EU capital markets in the past few years, approaching nearly 50% relative to GDP since 2014, there remains a notable gap in their development.

• 2021 capital markets union package
• 2022 capital markets union package
• Retail investment strategy

The EU therefore needs to enhance its efforts to further develop its capital markets.

More developed and integrated European capital markets would:

• allow companies, especially SMEs, to diversify their funding sources
• facilitate cross-border investment and attract more foreign investment into the EU
• make the EU financial system more stable, resilient and competitive
• increase options for savers and reduce financing costs for businesses
• strengthen the euro's role as an international investment currency
• support investment in innovation and contribute to the green and digital transitions

Alongside a well-functioning banking union, deep and liquid capital markets would contribute to the overall resilience of the economic and monetary union (EMU).

The EU's financial markets infrastructure

The integration of European capital markets remains relatively modest. The EU’s robust and well-regulated banking sector provides a large part of the financing needs for businesses in Europe. And it is mainly banks and insurance companies that offer saving and investment possibilities to citizens.

The EU's financial market infrastructure / Euro area

Capital markets in Europe remain fragmented along national lines, with their financial integration lagging behind the levels preceding the global financial crisis. Together with the relatively small size of those capital markets, this fragmentation impedes cross-border risk sharing. This lowers the EU's resilience to shocks.

Unlocking access to capital for businesses

The EU needs to make sure that European companies have the financing opportunities they need.

Especially in the start-up and scale-up phases, companies would benefit from deep and well-functioning European markets for risk capital. At present, foreign investment dominates the scale-up funding rounds. Dynamic and innovative EU businesses often do not have sufficient capital to compete globally and are obliged to seek funding abroad or to relocate overseas. European tech start-ups, for example, are much more frequently acquired by US firms than the other way round. There is also less access to venture capital (VC) investments compared to the US, where VC investments were ten times higher than in the EU in 2022.

IMF research shows that the fragmentation of European capital markets also leads to differences in funding costs for firms in different countries.

The current under-development of EU capital markets means that businesses are unable to fully benefit from the funding and investment that well-integrated European capital markets could offer.

This also affects the attractiveness of the EU as an investment location and firms’ decisions to scale up and be listed in the EU.

Improving financial literacy across the EU

EU citizens must have the knowledge and skills needed to make financial decisions, be it to decide on whether to open a bank account, take out a loan or make investments. Everyone should be able to understand the risks involved with borrowing or investing money.

Levels of financial literacy in the EU remain low, however. According to a Eurobarometer survey on financial literacy published in 2023, roughly half of the EU adult population does not have a sufficiently good understanding of basic financial concepts. 

64% of EU citizens display a medium level of financial literacy and 18% a low level.

With a view to helping Europeans make better-informed financial choices and encouraging them to invest on European financial markets, on 14 May 2024 the Council approved conclusions on financial literacy. The aim is to give guidance to the Commission and the member states on actions to improve citizens' knowledge and understanding of finance.

• Capital markets union: Council approves conclusions on financial literacy (press release, 14 May 2024)

Which of the following financial products do you currently have or have you had in the last two years?

See also

• Timeline - Capital markets union explained